Why construct accounts? • An historical record of financial performance • Monitor of current performance • Aid to management decision making • Taxation and other statutory disclosures

What is “accounting”? “….Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgements and decisions by users of the information….” A statement of basic accounting theory, American Accounting Association 1996

Financial accounting External reporting of performance Management accounting Internal reporting mechanism that provides information for those who make decisions about the business entity Used to Direct attention Monitor performance Solve problems Accounting fields

Conventions of accounting • Going concern • the entity is likely to remain in operation • Matching • comparison of revenue and expense over a similar period of time • Realisation • revenue should not be recognised until received and expenses not recognised until incurred • Consistency • Prudence • underestimating revenue and overestimating costs • Objectivity • exclude personal opinion

Conventions of accounting • Verifiable • accounts should be capable of independent verification • Unit of measure • common denominator (£ or $ or not both) • Periodicity • entity performance over a consistent period of time • Duality • every action has a consequence • Materiality • actions have to materially affect the entity • Relevance – all information relevant to user to be included

Cash items • I am giving you a £5 note • You are paying me £5 with a cheque • That crash has reduced the value of my car by £550

Trading period • Accounts are related to a specific time period • Annual - taxation • Monthly - regular reporting on progress • Cash items are adjusted to take into account the trading period • Allows accounts to be compared on a like for like basis

Assets • Fixed asset • An asset used by an enterprise for production • An asset intended for use on a continual basis • An asset not intended for sale • Current asset • An asset likely to be converted into cash within the trading period

Liabilities “….obligations of an entity to transfer economic benefits as a result of past transactions or events….” ASB (1995) Statement of Principles for Financial Reporting

Liabilities • Long term (fixed) liabilities • Liabilities expected to remain in place beyond the next trading period (12 months) • Current liabilities • Liabilities likely to be repaid within the trading period (12 months)

Trading valuations • Valuation of trading assets at the start and end of an accounting period that are used to operate the business • livestock, crops, cultivations • deadstock • Record the market value or the total cost to date at the start and end of an accounting period